Landmark Penalty Case Has Lessons for Exporters, Official Says
The record $1.19 billion criminal and civil penalty assessed against a Chinese company last month highlights some important export compliance lessons, a Bureau of Industry and Security official said recently. Doug Hassebrock, director of the BIS Office of Export Enforcement, told the agency’s Regulations and Procedures Technical Advisory Committee that in determining the size of the penalty BIS considered not only the value of the transactions at issue but also the nature of the company’s behavior (e.g., knowing and willful evasion of export laws and regulations). He added that BIS views these types of violations as national security cases, not export control cases, which increases not only the agency’s sense of urgency in pursuing them but also the likely size of any resulting penalties.
BIS found that from January 2010 through April 2016 Zhonxing Telecommunications Equipment Corporate and ZTE Kangxun Telecommunications Ltd. conspired to evade the U.S. embargo against Iran to obtain contracts with and related sales from Iranian entities to supply, build, operate, and/or service large-scale telecom networks in Iran, the backbone of which would be U.S.-origin equipment and software. Members of the company’s highest-level management were aware of and perpetuated this scheme. After telling the U.S. government the company had ceased its Iran-related activities following the initiation of a government investigation, those leaders decided to surreptitiously resume those activities, which continued until BIS added the company to the Entity List in 2016. Under the direction of those leaders the company engaged in an elaborate scheme to delete evidence of the illegal activities and make knowingly false and misleading representations and statements to U.S. law enforcement agencies.
The penalty assessed against ZTE included a $661 million penalty to be paid to BIS (with $300 million suspended), $430.5 million in combined criminal fines and forfeiture under a plea agreement with the Department of Justice, and $100.8 million as part of a settlement agreement with the Office of Foreign Assets Control. The company also agreed to seven years of monitoring, six years of audits, a seven-year suspended denial of export privileges, and three years’ probation. In addition, criminal penalties could still be issued against the company’s officers. Hassebrock said the unprecedented size and nature of these penalties are designed to incentivize good behavior in the future.
Hassebrock highlighted five lessons from this case to RPTAC members.
- Don’t lie to the government or your own attorneys, auditors, and employees. Once trust is breached, Hassebrock said, the government has no choice but to distrust you, which results in provisions like mandatory monitoring to make sure information you report in the future is accurate.
- Don’t create false or misleading records. ZTE took measures to cover up its illegal activity, such as using code words, that made it easy for BIS to show the violations were willful.
- Don’t destroy evidence. ZTE had a team specifically tasked with getting rid of incriminating documents whose members had to sign non-disclosure agreements concerning that activity.
- Don’t restart criminal activity during a BIS investigation. This makes it easy, Hassebrock said, for BIS to show that you committed willful violations by choosing profit over compliance.
- Don’t create a written strategy for violating the law. ZTE’s legal department prepared, and four senior executives ratified, a document that evaluated the various risks of violating U.S. export control laws and then set forth a “response plan” describing how the company would manage those risks while continuing its illegal export scheme.
For more information on export rules and how to avoid violating them, contact Steven Brotherton at (415) 490-1430.